How Much Milk is Being De-pooled? Lots!

In the Federal Milk Marketing Orders (FMMO), Class I milk for drinking cannot be de-pooled.  However, all other Classes of milk can be de-pooled.  When milk is de-pooled, it is not counted in the Federal Order statistics and it is not subject to the Federal Order processes, pricing, or statistics.

When is milk de-pooled?  When it is advantageous financially, milk will be de-pooled.  As an example, when the Class III milk is higher priced than the Class I milk the Producer Price Differential (PPD) will likely be negative.  To avoid a negative PPD, the Class III milk will be de-pooled.  When milk is de-pooled, it is not subject to Federal Order pricing, but Federal Order pricing nevertheless is typically used for the de-pooled milk.

How much milk is being de-pooled?  It varies by Federal Order as the de-pooling rules and Class usage mix varies among Federal Orders.  This post will review de-pooling of Class III milk in four of the major Federal Orders.  This includes California, the Southwest, the Upper Midwest, and the Northeast Orders.

The analysis is based on state-by-state cheese manufacturing data used in the prior post.  The amount of Federal Order cheese produced is estimated by totaling the states or partial states included in each Federal Order.  The amount of milk used for cheese is estimated based on a conversion of eight pounds of milk for each pound of cheese.  That amount of milk needed for cheese production is then compared to the amount of Class III milk listed by that Federal Order.  The data used is for the first seven months of 2021.

This allows a comparison of milk used for cheese compared to the amount of Class III milk listed for a specific Federal Order.  These comparisons are not an exact science.  The ratio of milk to cheese can vary, the timing of milk shipped vs. when cheese is made can vary, and the state vs. Federal Order boundaries can vary.  Nevertheless, by using seven months averaging, a reasonably accurate calculation of de-pooling can be developed.  

Why did California become a Federal Order?  In hindsight, the ability to de-pool seems to be a big factor.  Since the first months of becoming a Federal Order, massive de-pooling has occurred.  So far in 2021, 98 percent of the Class III milk was de-pooled in California.  That amounts to 11.1 billion pounds of Class III milk that was de-pooled in the first seven months of 2021 in the California Federal Order.

The Southwest Federal Order also had major de-pooling.  The Southwest Order is composed of New Mexico and Texas.  In the first seven months of 2021, the Southwest de-pooled 5.7 billion pounds of Class III milk, which is 93 percent of the Class III milk.  

The Upper Midwest produces mostly Class III milk for cheese.  Therefore, the Class III price and the "Uniform" or average price are typically very close.  The amount of the PPD is very small with only a few exceptions.  In 2021 through July, the Upper Midwest de-pooled 82 percent of their Class III milk.  By the calculations used for this post, 17.9 billion pounds of Class III milk were de-pooled in the first seven months of 2021.  The Upper Midwest is the only Federal Order that estimates the amount of de-pooled milk every month and their published estimates totaled 18.5 billion pounds of milk de-pooled in the first seven months of 2021, close to the estimate developed for this post.  The difference between the two estimates is just three percent which adds credibility to both de-pooling estimates.

De-pooling in the Northeast Federal Order is a little more difficult.  Nevertheless, 33 percent of the Class III milk was de-pooled.  This amounts to two billion pounds of de-pooled milk in the first seven months of 2021. 

WHAT DOES IT ALL MEAN?

The table below summarizes the estimated de-pooling in the four largest cheese producing Federal Orders.  In total for the first seven months of 2021, 81 percent of the Class III milk in these orders was de-pooled.  Milk for cheese is the largest use of milk in the U.S.  

If Idaho, the third largest cheese producing state was included, the amount of milk for cheese not included in Federal Order pricing would jump from 81 percent to 87 percent.  Idaho is not in any Federal Order.  These four Federal Orders covered and Idaho together make up 80 percent of the U.S. cheese production.

Estimated De-pooling in the Four Largest FMMOs

With most of Class III milk being de-pooled, does this mean the Federal Order system of payments is broken and out-of-date?  Does it need revision?  Does it serve any purpose or is it just wasted bureaucratic overhead?  This post will not attempt to answer these questions, but comments are welcome.

When de-pooling occurs, it does not create value, it only spreads the wealth differently.  Those who de-pool make more money, and those that are left in the pool make less.